“Applicable Labs”: The Fly in the PAMA Market-Based Pricing Ointment

The lab industry has no objection to basing Medicare payments for lab tests on the actual rates charged to payors in the private market. What has the industry so upset is how CMS has executed the concept.

The “Applicable Labs” Controversy

At the center of the controversy is which labs count as “applicable laboratories” in determining what the actual rates are for particular tests. Specifically, the CMS definition excludes hospital and community-based labs. In addition to being key components of the lab market, these labs have the leverage to command higher rates for tests from payors.

Result: The CMS formula is flawed and yields artificially low rates that do not reflect actual market rates.

CMS Digs in Its Heels

Industry groups like the American Clinical Laboratory Association and major labs like Quest and LabCorp have repeatedly urged CMS to revise its definition of “applicable laboratories,” or at the very least delay January 1, 2018 implementation of the PAMA-based Clinical Laboratory Fee Schedule (CLFS) pending further study.

But so far, those appeals have fallen on deaf ears. CMS’s only concession has been agreeing to include the very small number of hospital outreach labs that independently enroll in Medicare as labs with their own National Provider Identifier (NPI).

Preliminary Pricing

So the massive rate cuts contained in the preliminary 2018 CLFS issued by CMS on September 22, 2017 were all too predictable. According to the CMS Executive Summary, the proposed fee schedule is based on 1,942 labs broken down as follows:

“Applicable Labs” Submitting PAMA Pricing Data

Source: CMS, “Summary of Data Reporting for the Medicare Clinical Laboratory Fee Schedule Private Payor Rate-Based System”

The preliminary rate calculations are flawed and account for only about 34% of the lab market, with two major labs representing 80% of the volume used to calculate the rates, critics contend. The CMS proposal has also been criticized for basing rates on a weighted median cost rather than a weighted average cost resulting in artificially driving down the calculation of market prices for the top 20 tests.

CMS’s Ham-Handed Justification

In anticipation of the expected industry criticism, CMS notes in the Executive Summary that it performed a simulation which it claims shows that including more hospital, physician office and independent labs would not have significantly impacted rates. In fact, inclusion would have actually reduced reported rates by around 20%, the Summary contends.

But industry says that the simulation justification is laughable and only confirms just how distorted the CMS formula really is.  As an ACLA official notes, to measure the impact of including more hospital labs, CMS multiplied the 21 hospital labs that did submit pricing data by 10. As a result, the simulation included 210 labs, which is a pretty paltry number considering that there are roughly 7,000 hospital labs in the US.